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Report From the Red Hat Road Show
The following was written by "Barry the Suit"
Just got back from the Red Hat road show, Thursday, July 29th, 7:30AM at the Minneapolis Radisson. Was very interesting from an investment perspective. I'm up-to-date on Open Source, distros, etc., and was probably the only financial-type in the audience who knew who "Alan Cox" was when Bob Young mentioned him in passing. As for the rest (about 25 portfolio managers and analysts) I believe their collective reaction was "Huh?"
At least two other IPO road shows orignially scheduled for 7:30 a.m. moved to other time slots when they realized that Red Hat was the must-see road show of the day. Thus, while the Red Hat crowd was unusually large (most road shows in the Twin Cities host about 8-12 guests) it was full of people ready to see the next-big-thing, including some PMs who only come out for something special.
Bob Young, Matt Szulik, and Manoj George each made part of the presentation. Bob explained open source in general and Linux in particular. I thought he made a nice, newbie-level effort. He did, however, manage to confuse the crowd by explaining that the existence of "a Linux operating system" was a myth; there is only a Linux kernel, and then various distributions. Needless to say, the crowd did NOT go wild over that one.
Matt was more business-y, with descriptions of just where the revenue is going to come from, including the service offerings and the redhat.com portal, which according to the prospectus, now accounts for 17% of the company's total revenues. Finally, Manoj finished up, explaining that although RHAT operates at break-even right now, it plans to start losing money ("investing for growth") in the immediate future.
As if on cue, the first question in the Q&A was ... (drum roll), "you mean, one of your competitors could simply take your distribution's source code and repackage it as theirs and sell it?" Bob Young: "Yes." There were only a couple more questions (surprisingly few for such a large crowd attending such a hot deal road show) and then we were done at 8:35.
Takeaway: Bob Young couldn't have done a better job in presenting his case in an investor-friendly way, including an important description of the value-add of the Linux community, and what was in it for members who didn't get "the letter." But I couldn't help feeling, looking around the room, that people were wondering what the buzz was all about. Final tidbit: Goldman Sachs is the lead manager of the underwriting syndicate, and the research analysts covering Red Hat will be none other than Rick Sherlund, the research "axe" for Microsoft, and Michael Parekh, GS's lead Internet analyst. Pretty unusual, when you consider how much ink has been spilled and breath lost convincing people that Red Hat will make its money "in services."
Disclosure: I am an equity analyst for an investment company based in the Twin Cities. I have no opinion at this time about the value of Red Hat stock. The purpose of this post was simply to relay my view of the meeting. All the facts in my post related to Red Hat's performance are in the prospectus, which can be found at this page
So what kind of computer science degree do you have? Point & Click is what is supposed to not require such a degree. I don't have one, but I
did configure sendmail, yes even fetchmail, and procmail. And with netscape you won't need any of them at all. I did it, because I wanted to reprocess, filter, and sort my email. In Windows I couldn't do that without paying a few hundred $'s for maybe working software. And I'm well over 30, not a 15 year old hacker with to much time.
Back in 1996 I could never interest anybody in using Linux if I mentioned that it was free. If I mentioned "oh yeah, it's $49.95 from Red Hat Software, and it does the same thing that Windows NT does but it costs $500 less", that's a different thing. Free = worthless in the PHB's head, whereas cheap = "oh boy, what a deal!". The box and manual gave them reassurance that they'd actually bought something, even if that was one of the ugliest boxes in creation (grin). (The old yellow/black RH3.0.3 box, that is).
Send mail here if you want to reach me.
ebay.
-- your knees hurt, don't they?
I mean the idea that the company is 1) planning on loosing money,
Heard of any good IPO's for companies that weren't loosing money? The issue is whether they'll use their indebtedness to improve their business in such a way as to make more money later on.
2) any body can take their product,
That's what open-source is about. But that doesn't keep them from making money through services (which, for businesses, make up a much larger outlay than software purchases).
3) their biggest competitor is M$
Yep, and the fact that Microsoft sees Linux as a serious threat actually adds credibility. It's a Good Thing(tm).
These investors are just looking to see if they can make money off of this.
Yep. And they've sat through enough rah-rah glossy presentations to be pretty jaded concerning those "comforting things" you talk about. They'll go through the business plan with a microscope (and an accountant) before investing. The purpose of these presentations is to get them interested enough to read it. No one says "Great talk, Bob!" and whips out their wallet...
RH doesn't need investers playing "buzzword bingo." They need investers who will take the time to see just how this rather unusual business model would work, and who won't bolt the first time open source or Linux gets diss'ed in the trades. Honesty and a lack of pretentiousness is in their interest.
It sounds like Red Hat is being really open and honest about their IPO, which probably isn't what the suits expect. :)
:)
It's true that they aren't the only game in town, and they've been very good about funding R&D. It sounds like they're going to do that still, and try to grow, which would make them a huge distributor, as long as Linux continues to gain in popularity, and they hold onto their marketshare.
Redhat Linux 6.0 is already a superior product compared to Windows, (I'll love to see it when it stabilizes... 6.1, anyone?) and if the corporations buy the more expensive versions, they're going to get a lot of income.
Remember, many big corporations post losses. It isn't a sign of weakness, and sometimes it's expected. In fact, if you lose *less* than expected in quarterly earnings, don't be surprised if your stock goes up.
I want to get in on this as soon as I can, because of my faith in Red Hat, but if it weren't for that, I'd wait for it to drop, and then... buy a decent-sized chunk of it. Individual stocks are risky, but I like this company.
pb Reply or e-mail; don't vaguely moderate.
No, Bob Young did not make that particular comment about the proportion of Red Hat on servers and/or workstations. The facts and figures he did present were the familiar ones from IDC and NetCraft (e.g., the 17% server share in 1998, the 212% growth rate, the 27% web server market share, etc.)
I agree with you that the PMs and analysts are more concerned about what sort of advantage or lead Red Hat possesses; Bob Young's comments, however, which are consistent with those he's made in more technical forums, are that the network effects of open source development move the value add from the development of the software itself (which of course is handled by the unpaid "community") downstream to the assembly and testing of a distribution (Sorry, I got kind of buzz-wordy there...).
From what I understand, Red Hat makes money four ways.
1. Commercially selling new and frequently upgrading versions of the Red Hat Linux OS.
2. Extending new products to make customers happy... for example their Commerce Server edition , which includes transaction subsystems and credit-card-security systems.
3. Develops and sells user-friendly documentation. how user-friendly these are is up for debate of course.
4. Ongoing telephone and e-mail support. and this is what they try and stress the most. That your average person will BUY Linux depends on the support and services he gets.
Listen to the man. (All you RedHat bashers)
1000 SlashDot sigs
I am all amused about this RH IPO hoopla. I use and push only linux in my consultancy and the last M$ I used is windows 3.1
:-)
I don't know how good RH's customer support is now, they used to be LOUSY sometime back in their 4.0 days. Then again, I or for the systems I install , we don't need any support from RH.
Regarding buying RH stocks, I always buy microsoft stocks, and use linux. For a small investor, like some of the geeks' complaints about IPO here, why would you want to invest in a co. which is going to lose money and instead not invest in microsoft ? There are plenty of socially conscious investment firms, that don't invest in Philip Morris etc. I don't know if they know about RH. As far as I am concerned, my day job and investment are two entirely different playing fields. Besides, i need to put food on the family table
where did you go to school...
Can u name one new company that plans on being around 10 years down the road that is not loosing money. Amazon is spending billions building up their infrastructe.
Well I'm got a B.S. in Zoology and I hooked up my Mandrake box to my toaster.
Now I have a crontab make me some nice toast every morning. I just have to get Mod-Jam working so I can stop eating dry toast.
Free Mac Mini. Yes, I'm
Don't worry, chances are if you think it should be moderated down, someone with moderator status will too and will take care of it.
To make a short story long, stop posting stupid comments like:
Free Mac Mini. Yes, I'm
nevertheless, there is no point using negative tone about things that the investors don't understand, because all that they will infer from it is that is the negative tone
alex
Mandrake ;-)
When I upgrade, I buy Redhat when I upgrade, and I buy retail, from the chains. Why do I do that, when I could get the exact same thing for 1/20th the cost from Cheapbytes?
Because its the number of retail sales that drive ISV's picture of the size of the Linux market.
i paid for 5.2 (aka kernel ver. 2.0.36) But my next upgrade is coming from cheapbytes because i didn't NEED the manual or the tech support.
Opinionated Law Student Strikes Again!
If this is the best they can do. As the poster comments, Red Hat's purported revenue stream comes from support, but in reality they're squinting at two goals:
1) Make sure Red Hat is synonymous with Linux among newbies and PHB's
2) Aggregate brains in their development department so that the other distros can do little other than play catchup
(No, this isn't yet another "Red Hat is Microsoft!" rant.) The money they charge for their product is not much more than a "confidence payment" to satisfy the purchaser that they have made a legitimate business transaction. People who receive goods for free in our money-oriented economy can never really shake the impression that they're just playing around - gaining something trivial. In a sense, when you purchase Red Hat Linux, what you are really purchasing is the purchase price itself. Weird, huh?
-konstant
Yes! We are all individuals! I'm not!
But I got the invitation via snail mail the day before they were supposed to show up. I already had plans for that day that I could not change. *mutter*.
So basically, every Red Hat sale to me is a $50 - $80 support contract, which lets me tell my client that they have support available from the vendor. And I imagine, I'm not alone in this.
--
So are they trying to scare people away from the IPO? I mean the idea that the company is 1) planning on loosing money, 2) any body can take their product, and 3) their biggest competitor is M$, is probably gonna scare many investors away. I know all of these things, and understand why, and probably would invest in RH, but I use RH. These investors are just looking to see if they can make money off of this. Some investors are being told to worry over the buzzword bingo stocks. Then they hear none of the usual comforting things about a company from itself. Not sure if this was RH's best move. They might shoot themselves in the foot with this kind of talk. They really need to explain it better. Maybe have a laptop and show what RH6.0 looks like. Ohh shinny moving things.
I mean the point is to get people to invest, right?
-cpd
I'm glad to see yet another level-headed clear-thinking person from Minnesota. Too bad the weather is so bad, because the people are great!
Thanks for keeping us in touch with reality. I suppose this means that investment advisors will not be steering people in droves to RHAT. There are good and bad sides to that.
I wonder how they will do - *every*body will jump at the first bell, so they will skyrocket at first, that much is pretty obvious. But in the long run, what do they offer? Name recognition, to be sure; but as the first poster mentioned, with a free product ... no big revenue there. My company just partnered with RH to provide enterprise-level systems support; perhaps that will be a bigger market: "Why not fire that huge staff of NT sysadmins, and hire just a few of our guys to run linux instead?" Hmm, I wonder ... that seems like a mighty big risk this early in the game ...
So that I can get it cheap on the day after
:) ]
the IPO.
[
Well, that, and then there's 30 days of phone support and 90 days of email support - that certainly is worth something.
Regarding hope or lack thereof, I really don't know what RHAT will do in the first 30 days, or in the coming year(s). It'll certainly be interesting. I'm glad to see that the Road Show was packed, because I hadn't seen that much buzz in many of the online investing sites.
Sure, some of the 'hot' companies will make a mint in 10 years time, but a lot more will have fallen by the wayside.
> "you mean, one of your competitors could simply
> take your distribution's source code and
> repackage it as theirs and sell it?" Bob Young:
> "Yes."
Ummm... They already have - there are a number of companies selling Red Hat distributions which are not "Official Red Hat" - CheapBytes, Walnut Creek... This has been going on for quite some time, and it hasn't affected the bottom line... Red Hat's revenues have doubled every year since 1995 (look at the S-1/A filings).
As for the suggestions that RHAT is a poor choice due to the fact that they are not currently making a profit, take a look at MPPP (mp3.comcurrently @ 38 1/8, issued at $28 last week, then shot to $103 before levelling off)...
Let's see... Quarterly numbers for quarter ended Mar for mp3.com, May for Red Hat
Revenues Net income (loss)
Red Hat 2,797,000 (2,089,000)
mp3.com 665,785 (1,405,628)
so hmm... Red Hat losses last quarter were %75 of revenue. mp3.com's losses last quarter were %211 of revenues.
Even more interesting are the year end figures from last fiscal... Red Hat Revenues 10,790,000 against net loss of 91,000 (%0.8 of revenues). mp3.com revenues 1,162,438 against net loss of 357,538 (%30 of revenues).
So, hey, you know - Red Hat isn't doing that bad...
Companies that want to IPOs must put every scary fact or possibility out there in the prospectus and the IPO filings. Those are the rules. Furthermore, if something bad should happen to Red Hat's revenue stream in the future, and the possibility (even a remote possibility) of this happening could be forseen, but Red Hat didn't alert investors about this possibility, then the Red Hat principals could be sued or even criminally prosecuted.
For that reason, you can expect to read all kinds of dire things in the Red Hat IPO documents. They must spell out in big letters that investment in Red Hat is risky, even if they are convinced that Red Hat will conquer all obstacles and make piles of money.
Even after a company goes public, the quarterly filings with the SEC (the 10-Q statements) are always full of such warnings. The Linux community got all excited when Microsoft's SEC filing said that Linux was a possible threat to Microsoft's revenue stream. This statement doesn't mean that Microsoft believes it; it only means that they think that it is at least a very remote possibility.
Did Bob Young point out during presentation that 2/3 of all machines running redhat are servers and 2/3 of them are workstations? ;-) ;-)
I've seen him speak, and he makes a very nice presentation of Linux on a newbie level. I wonder if PMs and analysts were really looking for that though. I would guess that they are much more concerned about whether RH can keep it's market rather then if Linux is an OS or a kernel. According to trditional business theories RH position doesn't seem to be easy to defend since there is virtually no barriers to entry into the industry. On other hand two words "internet Portal" seem to have some magical powers to void all the existing business theories
Who in the *know* knows if RedHat's price increase has hurt them on number of sales?
I've been to CompUSA where the RedHat 6.0 shelves are relatively full when the Complete Linux (Mandrake repackaged by MacMillian) had only 1 or 2 boxes from what might have been a full shelf.
should be dirt cheap after the initial 200% runup
Just out of curiosity, does anyone think that businesses would realize that by plopping down some money for RedHat, they are helping to pay the RedHat developers (includes most of the top Linux kernel developers) salaries. If RedHat loses money, it will retard the development of RedHat linux and linux in general. Wouldn't this be some motivation to buy it?
:)
That's why I paid for it...
That's what they're selling. The software is inconsequential (as it should be) it's the support and the confidence in that support that they get. Don't know if that came off in the road show. Got another quick anecdote from a guy who saw the "show" down in NC to some fortune 50 companies.
.....
Bob Young: How many of you use Linux as your main desktop/server OS?
Crowd: (no hands go up)
BY: How many of you officically use Linux for mail/web servers?
Crowd: (two hands go up)
BY: How many of you think Linux is running somewhere on your network?
Crowd: (all hands go up)
(Insert quote about using the back door to gain the riches of the kingdom here)
.....
+&x
We don't make any money and don't even know how, but our company name ends in dot com. Get in on our IPO and you can turn over your stock the next day to some wannabe day trader and triple your money.
But seriously, I'm sure the SEC doesn't permit "disclosures" like this, but you know that's what any IPO investor is thinking these days.
Building a top notch support organization is not trivial. The distribution becomes more of a calling card than anything else ("we must know what we're doing, we built the thing").
I know lots of companies that have all the pieces that RedHat has (a good product, expert staff) but still suck at support. If they can integrate their pieces into a solid support organization and capitalize on their brand equity, they'll do well.
It is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail. - Abraham Maslow
Invest in a product that users with Computer science degrees cant configure mail services on?